Financial Decisions, Risk, and Financial Soundness: A Comparative Analysis of Islamic and Conventional Firms
Abstract
Financial decision-making lies at the center of how firms cope with risk, use resources, and preserve their financial health. This paper develops a comparative, conceptual view of Islamic and conventional finance to show how each system understands risk, uncertainty, and capital choices, and how these differences shape financial soundness. Conventional finance is built around risk–return optimization, debt-based structures, and market incentives, whereas Islamic finance is rooted in Sharīʿah principles that demand fairness, transparency, asset-backing, and risk-sharing. Although there is a rich body of work on corporate finance and Islamic finance separately, very few studies bring these strands together or examine how firm-specific risk (FSR) and macroeconomic risk (MER) jointly affect financial decisions and stability in Sharīʿah-compliant (SC) and non-compliant (SNC) firms. The paper pursues four aims: to describe how financial decisions are formed in Islamic versus conventional settings; to clarify how each framework thinks about financial soundness; to consider how economic uncertainty shapes financial choices; and to compare how SC and SNC firms deal with different types of risk. The review suggests that SC firms tend to operate with lower leverage, stronger reliance on internal and equity-based funding, and more cautious investment and liquidity policies, reflecting prohibitions on ribā, gharar, and speculation. SNC firms, by contrast, lean more heavily on debt and market signals, which can heighten their exposure to volatility. Overall, the study argues that Islamic finance offers a more ethically anchored and risk-aware model of stability, while conventional finance provides greater flexibility but remains more vulnerable to fragility driven by leverage and market shocks.
Keywords: Financial decisions, Islamic finance, financial soundness, risk and uncertainty, capital structure
JEL Classifications: G01, G32, G33, G41, Z12
